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As Google Builds Its Own Servers, IBM Sells Out to China

Facebook is now building its own servers, and that's bad news for IBM.

Photo: Jon Snyder/WIRED

IBM is offloading a large swath of its server business to the Chinese computer maker Lenovo, marking another milestone in the decline of the traditional server giants.

Lenovo told the world on Thursday that will spend $2.3 billion to buy the IBM division that sells low-cost servers built around "x86" processors from Intel and AMD – the type of machines that underpin so much of the internet. The move is further evidence that once formidable players in the server sector, including IBM, Dell, and HP, are giving way to a new server market centered around Asia and fed by the biggest players on the web, including Google, Amazon, and Facebook.

>In recent years, the giants of the web have moved away from the IBMs, the Dells, and the HPs, designing their own servers and purchasing them straight from manufacturers in Asia and elsewhere.

In recent years, these web giants have abandoned these big players to design their own servers and buy them directly from manufacturers in Asia and elsewhere. Because the Googles and the Facebooks of the world operate such enormous web services, they're constantly seeking ways of reducing the cost of their hardware. One especially effective way to do this is by cutting out the middlemen at, say, IBM.

They are not alone in this. Thanks in large part to Facebook freely sharing its designs and methods through its Open Compute Project, others are following suit, leaving IBM, Dell, and HP on the wrong side of history. In late 2012, Intel bigwig Diane Bryant told us 75 percent of the company’s server chip revenue now comes from eight companies and that one of them is Google. Four years before, she said, 75 percent came from Dell, HP, and IBM.

The rather healthy irony is the Asian manufacturers who are sniping IBM, Dell, and HP spent years building the machines those "big three" companies sold to the likes of Google and Facebook. Now, those same firms, called original design manufacturers, are dealing directly with those buyers. And so IBM is leaving the low-end server game entirely. Big Blue will continue selling more expensive machines to companies whose online operations aren't quite as large or as nimble as the web giants.

IBM attempted to offload its low-end server business to Lenovo last spring, and was seeking about $4 billion, says The New York Times. Nearly a year later, though, it settled for $2.3 billion. The move mirrors a deal IBM made with Lenovo nearly a decade ago, when it sold its PC business to the Chinese manufacturer. IBM knew the personal computer was becoming a commodity and big PC profits were a thing of the past. Now it's saying the same about servers.